3 – The digital age assets that will make you rich
In the previous post, I introduced the Biz 4.0 transformation model. In an earlier post, I made the case for why transformation is necessary. In this post we will explore why, at the most fundamental level, Biz 4.0 organisations exist. In other words, we look at the importance of strategic assets.
In introducing the Biz 4.0 model in the previous post, I stated that one of its tenets is as follows:
Smart organisations focus on growing assets, rather than making profits.
In my view, this is what will drive digital age organisations. Industrial era organisations in the private sector are largely devoted to making shareholders rich. Public sector organisations focus more on the needs of their ‘customers’, and thus are less preoccupied with making a profit, and thinking in ‘quarters’. Digital age organisations, public or private take a more holistic perspective.
The Biz 4.0 blueprint comprises five asset classes. They are collectively known as Value Creators (VC):
- Financial Capital.
- Physical Capital.
- Brand Capital.
- Intellectual Capital.
- Data Capital.
What is an asset?
Firstly, we do need to be clear on what we mean by an asset. Assets have the potential to increase in value over time. Examples of assets include:
- Shares in an index-linked Fortune 500 tracker.
- A painting from a renowned artist.
- A building.
- Intellectual property.
There is every possibility that these assets may well decrease in value, but there is also a real chance that you will be able to sell them for more than the purchase price. However, the return on your investment is not realised until you dispose of it. That said, you might gain some pleasure from looking at the painting and some benefit if the building is your home.
Real assets do not just lock up your investment throughout the period of ownership, they deliver financial value throughout the period of ownership. If you rented out rooms in your property or charged your guests an entry fee to see the painting, then these would become true assets.
Many things are mistakenly referred to as assets. Cars and servers come to mind. In most cases these will depreciate as soon as they are purchased. Though in rare cases if a car is well preserved and hardly used it might actually start to appreciate in value after a significant period of time.
The bottom line is that true assets do not just appreciate in value over time, they generate cash during the ownership period. CEOs who don’t get this will struggle in the digital age.
The second tenet of the Biz 4.0 model states:
The most successful business model of all time is that of the tribe. Modern day humans are still wired to be tribal. Smart organisations will harness this innate ability to create organisations that are adaptable to whatever is macro-economically thrown at them.
Tribes recognised the value of assets. They typically provided a source of tradable value. Digital age organisations would be wise to adopt an asset-focused approach to running the organisation.
Looking at each of the Biz 4.0 strategic assets (VC elements) in turn:
All roads lead to cash. With cash you can buy and retain talent, make shareholders happy, be an upstanding corporate citizen, innovate and build a war chest for what is certain to be an uncertain future. All other forms of capital must deliver financial capital. Excess cash can be invested to maximise the return on owning it.
This relates to the property, equipment, vehicle, land and other elements needed to run your business. My view is that this is a VC element that needs to be reduced or even eliminated. You might own your own factories and they might well sell for much more than the purchase price. But how long might it take you to sell such assets?
Agile organisations need to be able to pivot sharply and quickly if the market presents sufficient opportunity or threat. If you own an array of factories configured to manufacture latex products and latex is shown to trigger fatal illnesses as well as allergic reactions, then it is time to move on. If you are lumbered with a portfolio of factories and you cannot dispose of them quickly, your next move will be limited to a manufacturing play.
Alternatively, if you acquired your physical assets ‘as a service’ you could simply cancel the service. Smart organisations aim to have no physical assets unless they are certain their strategy has a long-term future and / or the assets also generate a steady flow of cash.
The previous two asset classes are well understood by accountants and so they are explicitly shown on the balance sheet. The next three do not enjoy such high status and are thus generally bundled into the Intangibles section.
Very few would argue that brand capital is an asset worth acquiring. The stronger your brand, the more loyal and price-insensitive your customers are likely to be. The luxury end of the market gets this. Beyond a certain point, it is little to do with the cost of manufacture and everything to do with the fact that most people cannot afford to buy one. Brands create perceptions and perceptions distort the buyer’s logic circuits, including their impulse control system.
I feel that humans are generally underrated in terms of their potential. Take any organisation and ask the question, what percentage of the people here are involved in making the strategically important decisions. Chances are it’s a very small percentage of the headcount. Probably no more than will fit around a boardroom table.
But each of us has a brain that contains many millennia of programming. Humans do creativity very well, though the industrial model has been quite successful in denaturing that innate ability. We do decision making very well when only a flimsy dataset is available. Yet, most organisations treat people as technology placeholders acquired to carry out mundane ‘cog’ work as part of the factory machine.
We are entering the human age in many respects. Those organisations that turn their collective cognitive capacity into market-pleasing services will be welcomed by digital age buyers.
Most organisations are sitting on an oil well, but they lack the tools to extract and refine the raw material; that raw material being data. Data is the fuel that drives digital age organisations, both from a decision making and value-creation perspective.
Remember data is the raw material and not the end-product. Nonetheless, smart extraction and refinement will lead to greater value. IoT and data analytics have a role to play here. As does attention management.
Data capital is the new, and arguably most important, asset class for the digital age. If your organisation is not on top of this, it is both flying blind and underserving its markets.
These five asset classes should be considered as the primary KPIs for the organisation. Your company’s strategy, in as much as strategy has a place in modern business, needs to be focused on how you will grow these strategic assets.
From an operations standpoint, everyone in your organisation needs to be working in some capacity to create, grow or maintain one or more of these assets. Anyone who is not clear on this or is working on something else is being mismanaged. In many cases, it will be more a case of shifting emphasis than reskilling.
Leadership in the digital age means driving the organisation to build its strategic assets. This is a key tenet of the Biz 4.0 model.